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Brown & Cole Stores, the Pacific Northwest retailing chain that traces its history back to 1909, filed a Chapter 11 petition in federal bankruptcy court in Seattle yesterday, providing the company with the ability to reorganize its finances and operations.

The filing, according to a statement released by the chain, affects only the 27-store chain, and not the two companies that own it – Brown & Cole Inc. which is the majority shareholder, and Associated Grocers, which also is the chain’s wholesaler.

Brown & Cole operates under various trade names including Food Depot, $ave-On-Food$, Cost Cutter and Food Pavilion, and has annual sales of approximately $300 million.

The company said yesterday that a “perfect storm” of circumstances created the environment that forced it into bankruptcy:

• Discontinuance of dividends on its ownership investment in the company’s wholesaler, Associated Grocers. Brown & Cole owns 25 percent of the wholesaler and is its second largest customer, and until 1999 was receiving about $2 million in annual dividends from the wholesaler. However, when AG ran into financial difficulties a half-dozen years ago, those dividend payments were discontinued and have not been revived even as it has improved its fiscal health.

Associated Grocers is in the middle of an internal review that could result in a sale of the company. Brown & Cole has advocated such a sale, believing that, according to a statement, “in order to enable AG retailers to monetize their investment, pay down debt, and reinvest in their retail establishments.”

• Spiraling health care costs. According to the company, Brown & Cole’s healthcare costs nearly doubled over a two to three year period, further impacting the company’s cash flow.

• Wal-Mart, which has 44 stores in Washington State and has announced plans for several more.

“We pay wages that are 50 percent higher than Wal-Mart and make health care payments on 95% of our workers, more than double Wal-Mart’s commitment,” said company CEO Craig Cole. “It’s hard to remain profitable competing with a low-wage, non-union operator like that, but fixing our financial problems on the backs of our employees was never an option that we were willing to pursue.”

According to a company statement, “The tipping point came with Wal-Mart’s saturation of markets in Washington, causing Brown & Cole to close four large stores in the Tri-Cities and Arlington areas. Even though the stores are closed, the company has continued to pay rent on the facilities and has been unable to find replacement tenants. The inability to shed lease expense on closed stores has put an additional burden on the company’s finances.”

Brown & Cole noted that it hasn’t been the only regional chain in the Pacific Northwest facing issues: Larry’s Markets of Seattle and Tidyman’s of Spokane both have closed in recent months.

“We don’t see this having the same result as Larry’s, which was a dissolution of the company. We plan on having a viable enterprise at the end of the Chapter 11 process”, Cole said. “Rather than limp along, we wanted to move ahead and adjust now to the new realities of today’s business climate”.

The company said it would use the Chapter 11 bankruptcy filing to allow it to work with its creditors on a plan to reorganize the company’s finances and to deal with such matters as surplus building lease expense. The company said it hopes to emerge from the process within a year as a leaner, stronger enterprise.

“A lot of good people have worked very hard to fend this off, but we just couldn’t get ahead of the adverse factors that have impacted us,” Cole said. “I’m grateful for the steadfast support of our employees and customers. Our main goal now is to make this process invisible to shoppers and as painless as possible for employees and our suppliers,” Cole stated. “We certainly are going to go to bat for our employees in trying to save family wage jobs and benefits.”
KC's View:
We first met Craig Cole more than a decade ago, and have long considered him to be one of the smartest and nicest people we’ve met in this industry. So, to be honest, it pained us when sources out in the Pacific Northwest informed us of the Chapter 11 filing. We were just glad to hear that this was not a Chapter 7 (liquidation) filing, and that Brown & Cole doesn’t seem to be going down the road traveled by Larry’s and Tidyman’s.

The bankruptcy filing should give the company the ability to get rid of the leases that are sucking money out of the company – both leases on closed stores and those on stores not living up to expectations.

But let us make a couple of suggestions/recommendations.

• Much as it goes against the company’s culture, hard decisions probably have to be made about health care costs. It sounds as if Brown & Cole has shown exceptional fealty to its employees, but maybe it now is time for the employees to return the favor. Some sort of new structure almost certainly needs to be worked out that will allow workers to shoulder a greater percentage of the health care burden, perhaps with incentives. We would encourage Brown & Cole and its employees to look for some sort of new and innovative paradigm, to not just revisit the solutions used by other companies. Break the mold. Not just because they can, but because they must.

• As far as the Wal-Mart competition goes, it strikes us that maybe it makes sense for Brown & Cole to reduce the number of formats that it runs…and to maybe de-emphasize those that have a low-price orientation. “Please the customer first” is the company’s motto, but it is the right time to re-evaluate what that means, who that customer is, and how this priority can and should change in the next five or ten years.

It will be interesting to see how the AG situation plays out, especially now that Brown & Cole’s situation as taken on greater clarity. While there have been speculation that the company might get sold, we’re hoping that doesn’t happen…if only because a healthy and prosperous AG makes for a more interesting marketplace.

By the way…

Sources tell MNB that Supervalu, hoping to make inroads in the Pacific Northwest wholesale business, sent personal invitations to a number of prospective retail customers in Washington State asking them to attend a series of presentations in Seattle. The title of the event: “Don’t Just Survive. Thrive.”

However, MNB is told that the event had to be cancelled because of lack of retailer interest.

Fascinating place, the Pacific Northwest. And despite the travails being experienced by companies like Brown & Cole and quality folks like Craig Cole, it sounds like a place where independence still means something.